Category: Indirect Taxes

INTRODUCTION:

It is a trite law that the issuance of a show cause notice creates only a contingent liability. The liability is confirmed only after adjudication. Once adjudicated, the authorities can initiate recovery of unpaid adjudicated dues after the lapse of the statutory time prescribed in this regard. However, can the recovery be initiated if the adjudication order is contested in an appeal? This is where the concept of ‘pre-deposit’ is relevant.

MANDATORY PRE-DEPOSIT PROVISIONS UNDER GST

The provisions of mandatory pre-deposit under GST are contained under section 107 (first appeal) and section 112 (second appeal to the Tribunal), both mandating pre-deposit as a condition precedent for filing appeals before the Appellate Authority and the Goods and Services Tax Appellate Tribunal (GSTAT), respectively. The relevant provisions u/s 107 and 112 are tabulated below for reference:

CONSTITUTIONAL VALIDITY OF PRE-DEPOSIT PROVISIONS:

The provisions relating to mandatory pre-deposit existed during the pre-GST regime under the central levies (service tax, customs, excise) and state levies (VAT, CST, etc.,). The constitutional validity of the said provisions was challenged before the Courts.

The Hon’ble High Court in Ganesh Yadav vs. UOI [2015 (39) S.T.R. 177 (All.)] upheld the constitutional validity of the pre-deposit provisions and held that the provisions were neither ultra vires, nor violative of Article 14 of the Constitution of India. It further relied on Government of AP v. P. Laxmi Devi [2008 (4) SCC 720 followed] to conclude that in exceptional cases, writ jurisdiction could be exercised for relaxation from the applicability of the said provisions. A similar view was also followed by the Jharkhand High Court in Satya Nand Jha vs. UOI [2016 SCC Online Jhar 2323], as approved by the Supreme Court in [2017 (349) E.L.T A155 (SC)]. The Supreme Court also dealt with the constitutional validity of similar provisions under the VAT laws in Tecnimont Pvt. Ltd. vs. State of Punjab [2019 (29) G.S.T.L. 737 (S.C.)] whereby following its’ own earlier decisions, it held as follows:

•  The provisions mandating pre-deposit are not violative of Article 14 of the Constitution, since they apply to all taxpayers [Anant Mills Co Ltd. vs. State of Gujarat – (1975) 2 SCC 175].
•  The constitutional validity was to be upheld even in cases where no exception was granted. It further held that the first appellate authority cannot grant relaxation in such cases, as such powers would render the mandatory pre-deposit provision nugatory & meaningless. However, in cases involving arbitrary, exorbitant demands based on extraneous considerations, the taxpayer could exercise a writ remedy under Article 226 in view of Maneka Gandhi vs. UOI [(1978) 1 SCC 248], which held that arbitrariness violates Article 14 [P. Laxmi Devi – (2008) 4 SCC 720]. In fact, even the Tribunal did not have the powers to grant such an exception, as held in G.D. Goenka World Institute vs. Union of India [2018-VIL-513-P&H-CE]. It was held that the Tribunal, being a creature of statute, is bound by the provisions of Section 35F (as amended), which “gives no flexibility waiving off the pre-condition of a deposit,” and thus, “there would be no escape from pre-deposit as the Tribunal lacks the power to entertain the appeal without it”.

APPLICABILITY OF PROVISIONS: TO BE DECIDED BASED ON THE PERIOD OF DISPUTE OR THE DATE OF FILING THE APPEAL?

In Ganesh Yadav’s case, the High Court further held that the provisions applicable on the date of filing the appeal would be relevant for the applicability of pre-deposit provisions, and not the provisions applicable for the period of underlying dispute. For instance, if a demand for the period up to March 2014 is confirmed on 31^st May, 2014 and the appeal is filed on

15^th August 2014, the amended provisions would apply to such appeal, i.e., while filing the appeal, the mandatory pre-deposit provisions would apply.

However, the Kerala High Court in Muthoot Finance Ltd. vs. UOI [2015 (38) S.T.R. 1133 (Ker.)] (though dissented by the Hon’ble Bombay High Court in Nimbus Communications vs. CST, Mumbai [2016 (44) S.T.R. 578 (Bom.]) took a contrary view that the mandatory pre-deposit provisions would not apply when the lis in question commenced before 06.08.2014 and the taxpayer would have an effective alternate remedy of filing an appeal to the CESTAT without mandatory pre-deposit.

SCOPE OF PRE-DEPOSIT PROVISIONS

The pre-deposit provisions under sections 112 (6) / 112 (8) require the payment of a specific percentage of the tax in dispute. However, the demand that emanates from an Order under sections 73 or 74 can be due to non-payment or short payment of tax (on outward or inward supplies), or the wrongful availing or utilization of input tax credit, or the erroneous sanctioning of a refund. In other words, there are three categories of demand, i.e., (a) non-payment/short payment of tax, (b) wrong availment / utilisation of input tax credit, or (c) erroneous refund.

The question that arises is whether a demand of input tax credit, or erroneous refund, can also qualify as a demand of tax, especially when the verbiage of sections 73/74 uses different terminologies.

It may be contended that situations governed by illustrations (b) & (c) above cannot constitute tax in dispute, since input tax credit, as well as erroneous refund cannot be treated at par with tax. This view finds support from the prosecution provisions u/s 132 of the CGST Act, 2017, wherein by an Explanation, it is clarified that the term “tax” shall include the amount of tax evaded or the amount of input tax credit wrongly availed or utilised or refund wrongly taken under the provisions of this Act, the State Goods and Services Tax Act, the Integrated Goods and Services Tax Act or the Union Territory Goods and Services Tax Act and cess levied under the Goods and Services Tax (Compensation to States) Act. It may be noted that the deeming fiction is created only for the purposes of Section 132 and there is no such deeming fiction under sections 107 / 112 to expand the scope of “tax” for the purposes of determination of the pre-deposit. Even when one compares the current provisions with the provisions of Section 35F of the Central Excise Act, 1944, it can be noticed that a specific Explanation to Section 35F deemed inter alia, amount of erroneous CENVAT Credit taken to be duty demanded.

It may however be noted that the prevalent ground level view in the matter is to continue the earlier interpretation of deeming input tax credit and erroneous refund as ‘tax in dispute’. The GSTN portal which has automated the process of filing appeals including pre-deposits indeed considers all these three situations as warranting pre-deposit. Therefore, while it may be legally possible to argue that in cases involving demand of input tax credit / erroneous refund, the amounts payable u/s 107 (6)/ 112 (8) shall be nil, the said position will be subject to litigation.

ENTERTAINED VS. FILED

An important change in the pre-deposit provisions under the GST regime as compared to the erstwhile regime is the use of word “filed” instead of “entertained”. While section 35F provided that no appeal shall be entertained, sections 107/112 restrict the filing of an appeal in the absence of compliance with the mandatory pre-deposit provisions. The distinction between “entertained” and “filed” was discussed by the CESTAT in Prakash & Co. vs. Commissioner [(2024) 18 Centax 94 (Tri.-All)] wherein the Tribunal held that there is no bar in filing appeal without the complete mandatory pre-deposit. However, such an appeal could not be entertained without the requisite mandatory pre-deposit. It further held that the word “entertained” could not be equated with “filing”. Similarly, in Trikoot Iron & Steel Casting Ltd. vs. Additional Director General (Adj), DGGSTI (Adj. Cell), New Delhi [(2023) 9 Centax 38 (Tri.-Del)], the Tribunal granted an additional time of one month to comply with the pre-deposit provision, which the Tribunal subsequently extended. However, with the GST Law requiring payment of pre-deposit as a condition for filing, it may no longer be possible to defer the pre-deposit even in genuine cases beyond the date of filing the appeal.

QUANTIFYING PRE-DEPOSIT

The next distinction lies in the quantification of the pre-deposit amount. Under the erstwhile regime, there was no distinction between the disputed tax and admitted tax, i.e., even if only part of the tax demand was disputed, the pre-deposit was to be quantified at the prescribed percentage of the total demand. The CESTAT upheld this view in VKS Projects Ltd. vs. CST, Mumbai [2018 (10) G.S.T.L. 573 (Tri. – Mumbai)]

However, sections 107 & 112 split the demand into admitted and disputed amounts, requiring that the entire admitted demand be pre-deposited before filing the appeal, and the prescribed percentage would apply only to the disputed demand and must be paid before the filing of the appeal. The provisions use the word “has paid” and not “pays”. Therefore, if the taxpayer has already paid an amount that is more than 10% / 20% of the disputed demand before the filing of the appeal (and the same is appropriated against the demand), the requirement of making an additional payment while filing the appeal does not arise.

The Supreme Court has dealt with the issue of whether such payments made under protest can be adjusted towards pre-deposit compliance or not in VVF (India) Limited vs. State of Maharashtra [(2023) 4 Centax 421 (S.C.)], in the context of Section 26(6A) of the Maharashtra VAT Act, 2002. It held that a taxing statute must be construed strictly and literally, and if the legislature intended to exclude such protest payments, a specific provision to that effect would have been made. This ruling emphasises that any payment made against the disputed liability, even before the final assessment order, contributes towards the mandatory pre-deposit.

However, it becomes essential to ensure that the payment of tax is intimated to the tax authorities before the adjudication is concluded, along with a request to appropriate such protest payments against the proposed demand. If the protest payments are not taken on record in the adjudication Order, the probability of the appellate authority / tribunal agreeing to treat such payments as protest payments and therefore, consider them towards compliance with the pre-deposit conditions would be unlikely. In such a circumstance, the taxpayer must consider filing an application for rectification of mistake.

At times, the taxpayers face specific administrative challenge. The appeals under GST are filed online. The adjudicating authority is required to issue the online summary of the Order, against which an appeal will be filed online and forms the basis for all future proceedings. However, while preparing the summary Orders, the payments made under protest are reduced from the demand confirmed. Therefore, while filing the online appeal form, the net demand (after appropriation) is reflected, and the demand confirmed does not match the corresponding demand in the detailed Order. In such cases, the taxpayer is unable to disclose the payment made under protest, and therefore, is unable to adjust such payments against the amounts payable under pre-deposit. The taxpayers should apply for rectification of the online summary in such cases, as any deviation in the pre-deposit amount generally results in the appellate authority rejecting the appeal for non-compliance with the pre-deposit provisions.

MANNER OF PAYMENT OF PRE-DEPOSIT

There has been a substantial controversy over how the pre-deposit can be paid. Under the erstwhile regime, the pre-deposit paid, either by GAR-7 challan or by debiting CENVAT account, was considered sufficient compliance with the pre-deposit provisions. The CESTAT, in SRD Nutrients Pvt Ltd vs. Commissioner of Central Excise & Service Tax, Guwahati [2018-VIL-138-CESTAT-KOL-ST], interpreting Section 35F of the Central Excise Act, 1944 (an analogous provision), observed that the section does not specifically mandate cash payment for pre-deposit. It held that if CENVAT credit is permissible for the payment of tax, the same can always be debited from the CENVAT account of an assessee. A similar view has been canvassed in the following decisions:

a) Emaar Mfg Land Ltd. vs. Commissioner [(2024) 17 Centax 268 (Tri.-Del)]

b) Kulithalai Municipality Appellant vs. The Commissioner of GST & Central Excise, Trichy [2021-VIL-301-CESTAT-CHE-ST]

c) Exelan Networking Technologies Pvt Ltd vs. Commercial Tax Officer [2020-VIL-76-MAD]

d) Akshay Steel Works Pvt. Ltd. vs. Union of India [2014 (304) E.L.T. 518 (Jhar.)]

However, with the advent of GST, the taxpayers faced the following issues:

a) Whether pre-deposit for appeals filed for the disputes under the erstwhile regimes after the introduction of GST could be made using the balances lying in the electronic cash/credit ledgers?

b) Whether pre-deposit for appeals filed for the GST Regime could be made using the balance lying in the electronic credit ledger?

The above issue emanated from sections 41 of the CGST Act, 2017, as applicable upto 01.10.2022 and section 49 (4) of the CGST Act, 2017. Section 41(2) of the CGST Act, 2017, before its amendment by the Finance Act, 2022, provided that the input tax credit availed shall be utilized only for payment of self-assessed output tax as per the return referred to in the said sub-section. Similarly, section 49(4) also restricted the use of the amount available in the ECR only for making payment towards output tax. The term “output tax” is defined u/s 2(82) to mean tax chargeable on taxable supply of goods or services or both made by him or by his agent, but excludes tax payable on reverse charge basis.

The Hon’ble High Court in the case of Jyoti Construction vs. Dy. Commissioner [2021 (54) G.S.T.L. 279 (Ori.)] held that the proviso to Section 41(2) (before amendment) limits the usage to which the ECR could be utilized. It cannot be used for making a pre-deposit payment at the time of filing the appeal, as per Section 107(6) of the OGST Act. While the above decision was in the context of GST regime, the Bombay High Court dealt with a similar issue for appeals under the erstwhile regime in Sodexo India Services Private Limited vs. UOI [2022 (382) E.L.T. 476 (Bom.)]. In this case, the Court set aside the Order-in-Appeal, dismissing the appeal where pre-deposit was made by DRC-03 utilizing cash, and directed the appellate authority to hear the matter on its merits. The Court also issued directions to CBIC to take a decision and pass suitable instructions on the validity of payments made through DRC-03 towards compliance with section 35F. Accordingly, the Board issued Instruction No. CBIC-240137/14/2022-SERVICE TAX SECTION-CBEC) dated 22.10.2022 as summarised below:

a) DRC-03 is not a prescribed mode for payment of pre-deposit, either under GST or service tax. Under GST, rule 108 (1) permits pre-deposit payment through the electronic cash/credit ledger and a separate DRC-03 is not required.

b) Pre-deposit is a requirement for filing the appeal and cannot be treated as arrears of tax. Therefore, it is not covered under the transitional provisions contained in section 142.

c) Therefore, pre-deposit payments for erstwhile regimes should be made in cash through the dedicated CBIC-GST integrated portal.

Subsequently, relying on the decision in Jyoti Construction, the CBIC instructions and section 41 of the CGST Act, 2017, the Tribunal in Jhonson Matthey Chemical India Private Limited vs. Assistant Commissioner [(2024) 18 Centax 371 (Tri.-All)] held that the credit lying in the electronic credit ledger can be utilized only for self-assessed output tax and cannot be utilized for making pre-deposit compliance since output tax cannot be equated to pre-deposit. By doing so, the Tribunal rejected the conclusion in Dell International Services vs. CCT [2019 (365) E.L.T. 813 (CESTAT)], wherein the CESTAT allowed pre-deposit to be made using CGST Credit, extending even to arrears of excise duty and service tax.

However, the Mumbai bench of the Tribunal permitted pre-deposit using ECR balances in Sapphire Cables & Services Pvt. Ltd. vs. Commissioner of CGST & CE, Belapur [(2024) 24 Centax 312 (Tri.-Bom)] and held as follows:

i) In view of section 174 of the CGST Act, 2017, the introduction of GST would not affect any proceeding relating to an appeal instituted after the commencement of GST, and a deeming friction is introduced to the effect that the proceedings under the erstwhile regime shall continue as if GST had not come into force.

ii) Therefore, CENVAT Credit available with Appellant on 01.07.2017 would be treated to have been in existence during filing of the appeal as if no transition to TRAN-1 had taken place. Under the erstwhile regime, it was an accepted practice to permit compliance with section 35F by utilising the CENVAT credit balance.

iii) The Board Instruction dated 22.10.2022 was issued after the appeal was filed and therefore, did not have retrospective effect.

Surprisingly, in D D Interiors vs. Commissioner [(2025) 30 Centax 405 (Tri.-Del)], following the decision in Jyoti Constructions and the Board Instructions, it was held that the pre-deposit payment made by cash, albeit using DRC-03, was not a valid mode of payment.

It is imperative to note that the Bombay High Court has distinguished the decision of Jyoti Construction in Oasis Realty vs. UOI [(2023) 3 Centax 86 (Bom.)] and held that the amount of ITC available in the electronic credit ledger can be utilized towards payment of the tax. Relying on CBIC Circular No. 186/18/2022-GST dated 27.12.2022, it explained the scope of section 49 (4) of the CGST Act, 2017 and held that any payment towards output tax, whether self-assessed in the return or payable as a consequence of any proceeding instituted under the MGST Act can be made by utilization of the amount available in ECR. The Court therefore concluded that there cannot be a restriction on utilising the ECR balance for complying with the pre-deposit provisions. In SKH Metals Ltd. vs. Union of India [2024-VIL-245-ALH], the Allahabad High Court specifically permitted the petitioner to utilize the amount available in the Electronic Credit Ledger to pay the 10% of tax in dispute as prescribed under Section 107(6) of the CGST Act.

The Gujarat High Court also followed a similar view in the case of Yasho Industries Limited vs. UOI [(2024) 24 Centax 338 (Guj.)], upheld by the Hon’ble Supreme Court in (2025) 30 Centax 352 (S.C.). It may however be noted that the appeal against the contrary view of the Patna High Court in Flipkart Internet Pvt. Ltd. vs. State of Bihar [(2023) 13 Centax 83 (Pat.)] is still pending before the Supreme Court [(2023) 13 Centax 103 (S.C.)] where an interim stay is granted pending disposal of the appeal.

MODE OF PRE-DEPOSIT TO DEPEND ON THE NATURE OF THE UNDERLYING DEMAND

The discussion in the previous section shows that pre-deposit compliance could be made using the balance lying in the electronic credit register. However, section 49 (4) permits the utilisation of the balance lying in ECR only towards output tax, which excludes tax payable on a reverse charge basis. While the above decisions were in the context of output tax, in the context of erstwhile regime, the Tribunal has in Arunachala Gounder Textile Mills Pvt. Ltd. vs. CCE & ST, Salem [2016 (46) S.T.R. 171 (Tri. – Chennai)] wherein the Tribunal, referring to the restriction on use of CENVAT credit towards payment of reverse charge liability, held that pre-deposit for RCM liability could not be discharged using credit balance. The same analogy may continue to apply even under the GST regime, since a similar restriction exists under GST as well.

This takes us to a dispute relating to an erroneous refund. Generally, a taxpayer becomes entitled to a refund based on a Refund Sanction Order passed by the Proper Officer. Such an Order becomes an appealable Order and therefore, if the Department is aggrieved with it, they must file an appeal u/s 107/112. Assuming the Department succeeds in the first appeal and the taxpayer wishes to file an appeal against it, the question that arises is whether the pre-deposit provisions u/s 112 will apply to such an appeal or not? A perusal of section 112 (8) indicates that the pre-deposit provision applies when there is a tax in dispute. The term “tax” as defined under Section 2(108) of the CGST Act means the tax leviable under the Act. The amount in question is not a tax on a transaction but a refund that is now sought to be recovered. A provision imposing an onerous condition on the right to appeal must be construed strictly. As such, the term “tax in dispute” cannot be expansively interpreted to include the recovery of a sanctioned refund. It can further be argued that the legislative construction of Section 112(8), by explicitly mentioning the pre-deposit made under Section 107(6), strongly indicates that it primarily envisages a scenario where a taxpayer, having lost at the first adjudication and having made a 10% pre-deposit to appeal to the first Appellate Authority, loses again and wishes to file a second appeal before the GSTAT. It can also be argued that by merely succeeding in an appeal against a refund sanction order does not result in the creation of a demand. The demand gets created when a notice is issued u/s 73 or 74, and therefore, unless there is an Order u/s 73 or 74, the pre-deposit provisions cannot apply, Therefore, a view can be taken that no pre-deposit is applicable in case of appeal involving erroneous refund.

In many cases, it is observed that the Department, instead of filing an appeal against Refund Sanction Order, directly issues a SCN u/s 73 or 74 and the demand is confirmed. Without going into the legality of this practice, the question that arises is whether, in such cases, the taxpayer would be required to comply with pre-deposit provisions or not? The answer to this would be in positive, since a demand is created against the taxpayer. This leads to the question of whether the pre-deposit could be paid using balance in electronic credit ledger, since the taxpayer has already received the refund in cash. The answer to this would be negative, applying the principles laid down in Arunachala Gounder Textile Mills, since the benefit has been taken in cash, its’ recovery can also be only by cash

REFUND OF PRE-DEPOSIT ALONG WITH INTEREST IF THE MATTER IS DECIDED IN FAVOUR OF TAXPAYERS

A critical aspect of the pre-deposit mechanism, which ensures fairness and upholds the principle of justice, is the provision for refund of the pre-deposited amount along with interest, should the final decision in the appellate proceedings be in favour of the appellant.

Section 115 of the CGST Act, 2017, explicitly addresses this. It stipulates that “Where an amount paid by the appellant under section 107(6) or section 112(8) is required to be refunded consequent to any order of the Appellate Authority or of the Appellate Tribunal, interest at the rate specified under section 56 shall be payable in respect of such refund from the date of payment of the amount till the date of refund of such amount”. This provision aligns with similar clauses in prior tax statutes, such as Section 35FF of the Central Excise Act, 1944, and Section 129EE of the Customs Act, 1962. Section 129EE, for instance, mandates interest at a rate fixed by the Central Government (not below 5% and not exceeding 36% per annum) on such amounts from the date of payment till the date of refund.

APPLICABILITY OF LIMITATION FOR REFUND OF PRE-DEPOSIT

Under the erstwhile regime, Courts have consistently held that the limitation does not apply to claims for refund of pre-deposit. The Mumbai bench of the Tribunal in the case of Alliance Francaise De Delhi vs. Commissioner [(2025) 27 Centax 183 (Tri.-Del)] has reiterated this principle under the erstwhile regime, wherein it held that the time limitation under Section 11B, ibid, is not applicable to the refund of pre-deposit.

However, under GST, section 54 prescribes a time limit for claim of refund of pre-deposit. Section 54 (1) thereof reads as follows:

(1) Any person claiming refund of any tax and interest, if any, paid on such tax or any other amount paid by him, may make an application before the expiry of two years from the relevant date in such form and manner as may be prescribed:

The term relevant date is further defined by explanation as follows:

(2) “relevant date” means—

… ….

(d) in case where the tax becomes refundable as a consequence of judgment, decree, order or direction of the Appellate Authority, Appellate Tribunal or any court, the date of communication of such judgment, decree, order or direction;
… …

In view of the explicit provisions, the Department has interpreted that the limitation applies to all refund claims, including the refund of the pre-deposit. However, the Madras High Court has in Lenovo India Private Limited vs. Jt. Commissioner [2023-VIL-799-MAD] held that the use of the word “may” in section 54 (1) means the taxpayer doesn’t need to file a refund claim within 2 years, and a refund application can be filed even beyond two years. The Jharkhand High Court recently followed this view in BLA Infrastructure Private Limited vs. State of Jharkhand [2025-VIL-103-JHR].

APPLICABILITY OF UNJUST ENRICHMENT TO REFUND OF PRE-DEPOSIT PAYMENT:

It is a well-established principle that pre-deposit for filing an appeal is not a payment of duty or tax per se, but rather a deposit made as a condition for exercising the statutory right of appeal. Consequently, the refund of such pre-deposits is generally not subjected to the rigorous process of refund of duty under Section 11B of the Central Excise Act, 1944 (or Section 27 of the Customs Act, 1962), which often involves the doctrine of unjust enrichment.
The Bombay High Court, in Suvidhe Ltd. vs. Union of India [1996 (82) E.L.T. 177 (Bom.)] held that Section 11B is “never applicable to such deposit since it is not a payment of duty but only a pre-deposit for availing the right of appeal”. The Court further emphasised that the “doctrine of unjust enrichment has no application to such deposit,” and therefore, the amount is “bound to be refunded when appeal is allowed with consequential relief”. This judgment quashed a show cause notice issued by the department for forfeiture of pre-deposit, terming it “thoroughly dishonest and baseless,” and ordered the refund with 15% interest per annum.

Similarly, in Swarna Techno Construction Pvt. Ltd. vs. Commissioner of Central Tax & C. Ex., Belgaum [2022 (379) E.L.T. 116 (Tri. – Bang.)], the Tribunal ruled that retention of excess pre-deposit (beyond the mandatory amount) was “without authority of law and in violation of Article 265 of Constitution of India”. Therefore, section 11B of the Central Excise Act, 1944, had no application.

GROUNDS TO WITHHOLD THE REFUND OF PRE-DEPOSIT

However, it has been observed that the Department has generally been hesitant to sanction refunds of pre-deposit and interest. A common pretext for withholding the refund is the Department’s intention to file an appeal/ having already filed an appeal. The SC dealt with this issue in the pre-GST regime. In Atul Limited vs. Commissioner of Central Excise, Surat-II [2005 (188) E.L.T. 21 (Guj.)], The pre-deposit refund was withheld on the pretext that they were filing an appeal. The High Court rejected this, and directed the refund with 18% interest per annum if not paid within a fortnight, reiterating the Board’s circular against withholding refunds merely because the Department files an appeal. This was upheld by the Hon’ble Supreme Court in 2006 (194) E.L.T. A85 (S.C.).

However, under GST, the Department may invoke section 54 (11) which provides that if order giving rise to a refund is the subject matter of an appeal or further proceedings or where any other proceedings under this Act is pending and the Commissioner is of the opinion that grant of such refund is likely to adversely affect the revenue in the said appeal or other proceedings on account of malfeasance or fraud committed, he may, after giving the taxable person an opportunity of being heard, withhold the refund till he may determine.
However, the Commissioner’s action to withhold the refund on the pretext of a department appeal against an Order that is not stayed by a higher authority, may not go in line with the judicial principle laid down in Atul Limited and therefore, may be subject to judicial review.

INTEREST ON REFUND OF PRE-DEPOSIT

Section 115 provides for interest on refund of amount paid for admission of appeal. It provides that the amount paid u/s 107(6), or u/s 112(8), is required to be refunded consequent to any order of the Appellate Authority or of the Appellate Tribunal, and interest at the rate specified under section 56 shall be payable in respect of such refund from the date of payment of the amount till the date of refund of such amount.

Courts have consistently intervened to ensure timely refunds of pre-deposits with interest. In Amin Mehdi Merchant vs. S.M. Karnik, Asstt. Coll. Of Customs, Bombay [1995 (80) E.L.T. 777 (Bom.)], the Bombay High Court, noting the Department’s failure to grant refund despite the Appellate Collector’s order being upheld by CEGAT, ordered the refund with 12% interest per annum from the date of the Appellate Tribunal’s order till the date of payment. Similarly, in Eastern Coils Private Ltd. vs. Commr. of C. Ex., Kolkata-I [2003 (153) E.L.T. 290 (Cal.)], affirmed by the Supreme Court, it was held that if an appellate authority or Tribunal directs a refund, the governmental authority cannot be “a privileged person in refunding the same without interest”. However, if the Department does not sanction such interest, the taxpayer shall be required to follow up with the Department by filing a refund claim and follow the prescribed appellate procedure, and cannot seek direct recourse from the High Court, as held in Kaleesuwari Refinery Pvt. Ltd. vs. Asstt. Commr. of C. Ex., Chennai [2022 (379) E.L.T. 303 (Mad.)].

It must also be noted that the interest is payable not only on the tax pre-deposit, but also on interest/penalty paid as pre-deposit, as held by Mercedes-Benz India Pvt Ltd vs. Commissioner of Central Tax, Pune-I [2020-VIL-179-CESTAT-MUM-CE].

In Brahmaputra Cracker and Polymer Ltd. Versus Commissioner of CGST & Excise, Dibrugarh [(2024) 24 Centax 112 (Tri.-Cal)], the taxpayer paid the entire tax under protest before filing the appeal. While dealing with a dispute relating to grant of interest on such dispute, the Tribunal held that interest was due only to the extent of mandatory pre-deposit and not the excess payment made. However, this decision is contrary to Principal Commissioner vs. Emmar Mfg Construction Pvt. Ltd. [2021 (55) G.S.T.L. 311 (Tri. – Del.)] wherein the Tribunal held that the amount deposited during investigation and/or pending litigation is ipso facto pre-deposit and interest payable on such amount to the assessee being successful in appeal. Perhaps, the decision of the Supreme Court in Sandvik Asia Limited vs. CIT [2006 (196) E.L.T. 257 (S.C.)], wherein it was held that the taxpayer must be compensated in case of excess collection of tax, or withholding of any amounts from an assessee without authority of law may be the deciding factor for this dispute.

CONCLUSION

The mechanism of pre-deposit under the Goods and Services Tax (GST) regime stands as a formidable yet indispensable statutory precondition for accessing the appellate process. Its role as a sine qua non for the right to appeal, as enshrined in Sections 107 and 112 has been a subject of extensive deliberation, litigation, and subsequent legislative and administrative clarification. While the mandate to pre-deposit a specified percentage of the disputed tax is an established principle to safeguard revenue interests and filter frivolous litigation, its implementation has navigated a complex and evolutionary path since the inception of GST.

While the requirement of pre-deposit remains a critical and non-negotiable step in GST litigation, the journey from ambiguity to clarity, propelled by judicial intervention and responsive administrative action, has been noteworthy. The settled position on the use of the Electronic Credit Ledger, coupled with forthcoming legislative relaxations, reflects a maturation of the GST framework, striving to balance revenue security with the fundamental right of a taxpayer to a fair and accessible appellate remedy.

BCAJ Admin

INTRODUCTION

Notification 16/2024-CT has notified 1st April, 2025 as the date from which the proposed amendments to the provisions relating to ‘input service distributor’ will come into effect. In view of the far-reaching implications of the said amendment, this article decodes the provisions relating to ‘input service distributor’, and the interplay the said concept has with the concept of ‘cross charge’ as propounded in view of the provisions of entry 2 of Schedule I of the CGST Act, 2017.

BACKGROUND OF EARLIER LAWS

Prior to the imposition of GST, a central excise duty was imposed on the manufacture of excisable goods. The central excise law required separate registration for each of the premises from where the manufacturing activity was carried out. While the CENVAT Credit Rules as amended from time to time provided for claim of credit of inputs and capital goods used in the manufacture of final products, there was substantial emphasis laid on receipt of the goods in the registered premises and documentary evidence in the form of tax compliant invoices reflecting the said address of the registered premises.

In the said backdrop, when the said Rules were expanded to also permit the credit of input services used in the manufacture of the final products, a need was felt for implementing the existing procedural framework in a realistic manner. In the case of services, it was very common for the said services to be centrally procured at the corporate office. To enable a free flow of credit to the manufacturing locations, the concept of ‘input service distributor’ was introduced under the erstwhile CENVAT Credit Rules, 2004. The said concept permitted an office of the manufacturer to receive invoices towards the receipt of services (either by the said office or by the respective manufacturing units) and distribute the credit embedded in such invoices to the respective manufacturing units. Based on the said concept and registration, the corporate office of a manufacturer could pay for a customs house agent from the office receive an invoice in this regard, and distribute the credit to the concerned manufacturing unit. Similarly, it could pay for corporate services like statutory audits and distribute the credit proportionately to all manufacturing units (since the definition of input service was wide enough to cover services directly or indirectly used in the manufacture of the final product and included various activities related to business and the law also did not require the receipt of input services at the registered premises, such statutory audit services were eligible for credit at the manufacturing locations). The concept of input service distributor was therefore a blessing under the said regime permitting a free flow of credits from the corporate office to the duty-discharging manufacturing locations.

It may be noted that the definition of ‘input service distributor’ under the CENVAT Credit Rules, 2004 laid emphasis on the office receiving an invoice and laid no emphasis on whether the services were received by the office or the manufacturing location and whether the invoice or the services were received by the office on its’ own account or ‘for or on behalf of’ the manufacturing location. This is evident on a plain reading of the definition of input service distributor as provided under 2(m) of the erstwhile CENVAT Credit Rules, 2004, which is reproduced below for ready reference.

“input service distributor” means an office of the manufacturer or producer of final products or provider of output service, which receives invoices issued under rule 4A of the Service Tax Rules, 1994 towards purchases of input services and issues invoice, bill or, as the case may be, challan for the purposes of distributing the credit of service tax paid on the said services to such manufacturer or producer or provider, [or an outsourced manufacturing unit] as the case may be

— Emphasis supplied

The concept of ‘input service distributor’ under the CENVAT Credit Rules, 2004 applied to service providers as well. However, in view of the facility for centralized registration available under the service tax law, the said concept had limited applicability except in the case of taxpayers who had obtained decentralized registrations.

WELCOME GST

GST was introduced as a comprehensive indirect tax modeled on the principle of destination-based consumption tax. However, in view of the federal structure and the Constitutional mandate, the law required distinct registration in each of the States from which the taxpayer supplied taxable goods or services. This need for distinct state-level registration triggered a fundamental challenge of imbalance in input tax credits and output taxes in cases where the inward procurements are effected in one State and the outward supplies are effected from another State. Perhaps to address the said situation, Entry 2 was inserted in Schedule I to deem the supply of goods or services or both between distinct persons as liable for payment of GST even if the said supplies are made without consideration. Accordingly, an office warehouse, or factory in the State procuring the inward supplies could raise a tax invoice on a branch warehouse, or factory located in another State for effecting the deemed outward supplies to the said branch warehouse, or factory (even though there is no monetary consideration and the supply is between two units of the same legal entity). Such discharge of output tax by the first state would be eligible as input tax credit to the other state resulting in no revenue loss to the taxpayer but at the same time permitting free flow of credits from the input procuring locations to the output supplying locations. In trade parlance, such raising of internal tax invoice is referred to as ‘branch transfer’ in case of deemed supply of goods and ‘cross charge’ in case of deemed supply of services.

Despite having introduced the above deeming fiction to address the issue of imbalance in input tax credits and output taxes, the Legislature, in its wisdom deemed it fit to continue with the provisions of ‘input service distributor’ existing in the erstwhile CENVAT Credit Rules, 2004. The definition was amended mutatis mutandis, permitting the input service distributor to receive a tax invoice and issue an ISD Invoice for distribution of the said credit without any specific emphasis on whether the services were received by the said office or the other unit and whether the invoice or the services were received by the said office on its’ own account or ‘for or on behalf of’ the other unit. The relevant definition of ‘input service distributor’ under section 2(61) at the time of the introduction of GST is reproduced below for ready reference.

“input service distributor” means an office of the supplier of goods or services or both, which receives tax invoices issued under section 31 towards the receipt of input services and issues a prescribed document for the purposes of distributing the credit of central tax, state tax, integrated tax or Union territory tax paid on the said services to a supplier of taxable goods or services or both having the same PAN as that of the said office.

— Emphasis supplied for suitable comparison with the erstwhile definition under CCR, 2004

On a comparison of the above definition with the erstwhile definition under CCR, 2004, it is evident that both definitions are pari materia with no substantial change in the scope of the said provisions.

CONTROVERSIES GALORE!

The co-existence of Schedule I, Entry 2 (‘cross charge provision’), and Section 20 (‘input service distributor’) presented substantial confusion since apparently, both the provisions appeared to address a similar problem of ‘imbalance in input tax credit and output taxes’ in different ways. In view of the proviso to Rule 28(1) permitting flexibility in the valuation of the cross charge in case the recipient is eligible for full input tax credit and FAQ issued by the CBIC clarifying that registration as an input service distributor is optional, there was a view that a taxpayer may implement either of the two provisions to address the problem, whereas certain advance rulings canvassed a view that both the provisions operate in different set of situations and as such, both the provisions need independent implementation.

The matter was taken up by the GST Council in its’ 50th Meeting held in July 2023, wherein it was clarified that the provisions of ‘input service distributor’ are indeed optional. Further clarifications were also provided relaxing the rigors of the applicability of ‘cross charge’ provisions. At the same time, the GST Council suggested that the provisions of ‘input service distributor’ be made mandatory prospectively from a date to be notified in the future. Accordingly, suitable changes have been proposed in the CGST Act, 2017 and the CGST Rules, 2017, and the said changes are proposed to be made effective from 1st April, 2025.

KEY AMENDMENT

As stated above, there are amendments to various sections and rules. However, the fundamental amendment pertains to the definition of ‘input service distributor’ and the amended definition u/s 2(61) needs detailed scrutiny to understand the impact of the change being proposed in the correct perspective. The amended definition (as proposed to be effective from 1st April, 2025) is reproduced below for ready reference:

“Input Service Distributor” means an office of the supplier of goods or services or both that receives tax invoices towards the receipt of input services, including invoices in respect of services liable to tax under sub-section (3) or sub-section (4) of section 9, for or on behalf of distinct persons referred to in section 25, and liable to distribute the input tax credit in respect of such invoices in the manner provided in section 20

— Emphasis supplied for suitable comparison with the erstwhile definition under CCR, 2004, and the pre-amended definition under section 2(61) of the CGST Act, 2017

On a perusal of the above-amended definition, it is evident that there are two substantial amendments being carried out as compared to the erstwhile definition under CCR, 2004 and the pre-amended definition under section 2(61) of the CGST Act, 2017:

1. The phrase ‘for or on behalf of distinct persons’ is being introduced for the first time in the definition of ‘input service distributor’

2. The ‘input service distributor’ is made ‘liable’ to distribute the input tax credit, thus making the provisions of the input service distributor mandatory.

The judicial interpretation of the phrase ‘on behalf of’ is fairly settled. The said phrase connotes the existence of an agency relationship between the two parties (State of Mysore vs. Gangamma AIR 1965 Mysore 235). In the context of property, it was held that the holder of the property was only a representative of the real owner (Kripashankar vs. Commissioner of Wealth Tax AIR 1966 Patna 371). Even in the context of intermediary services under GST, the concept of agency vs. principal and the implications of the phrase ‘on behalf of’ has been exhaustively explained.

Extending the said interpretation of the phrase to the current context, it can be understood that the provisions of ‘input service distributor’ are triggered in a situation where an ISD office receives tax invoices towards the receipt of input services for or on behalf of distinct persons. As compared to the erstwhile definition under the CCR, 2004, and the pre-amended definition under the GST Law, clearly the introduction of this phrase reduces the scope of coverage under ISD post amendment. Effective from 1st April, 2025, it would therefore be important to distinguish between a situation where an input service is received by an office on behalf of a distinct person and an input service that is received by an office on its’ own account.

A few examples may illustrate the implications of this interpretation:

1. The head office in Maharashtra appoints and pays for security services procured at the factory located in Gujarat. Since the security services are received by the factory located in Gujarat, the tax invoice for the said service is received by the head office ‘for or on behalf of’ the factory in Gujarat, thus triggering the mandate of registration as an input service distribution and the consequent distribution of credit to Gujarat. Incidentally, a similar example was explained in a draft circular recommended by the Law Committee and placed before the GST Council in its’ 35th Meeting. However, the said Circular never saw the light of the day.

2. The head office in Maharashtra appoints and pays for goods transportation services procured at the factory located in Gujarat. It also pays the GST under reverse charge mechanism on such GTA services. Since the GTA services are received by the factory located in Gujarat, the tax invoice for the said service is received by the head office ‘for or on behalf of’ the factory in Gujarat, thus triggering the mandate of registration as an input service distribution and the consequent distribution of credit to Gujarat.

3. The head office in Maharashtra enters into a contract with an insurance company for insurance of assets located across the country. There are assets located in Maharashtra and also in the state of Gujarat. To the extent of assets located at the Gujarat factory, the insurance service of coverage of risk is received by the factory located in Gujarat, and the tax invoice for the said service is received by the head office ‘for or on behalf of’ the factory in Gujarat, thus triggering the mandate of registration as an input service distribution and the consequent distribution of credit to Gujarat.

While the above specific examples may look simplistic, where would one draw the line to say that the instance is that of service received ‘on behalf of’ a distinct person or a service received on ‘own account’. Let us understand this through a couple of more examples:

1. The head office in Maharashtra imports certain raw materials at the Mumbai port and transports the said goods to a warehouse in Bhiwandi. It appoints and pays for goods transportation services for the movement from Mumbai port to Bhiwandi. After some time, the said raw materials are further supplied to the factory located in Gujarat at a value prescribed under rule 28. It is obvious that in this scenario, the transportation and warehousing services are not received by the factory located in Gujarat, but are received by the head office on its’ own account. In fact, the cost of such transportation and warehousing services would become components of the cost calculation for arriving at a valuation under rule 28. Therefore, such services would not be a subject matter of input service distributor (but indirectly become a part of Schedule I, Entry 2 by way of the value of goods being ‘branch transferred’)

2. The head office in Maharashtra houses a centralized Human Relations Team. The said Team is responsible for addressing comprehensively all the HR requirements of the company including the employees at the factory located in Gujarat. If the HR Team places an advertisement in the newspaper inviting applications from prospective candidates, can it be said that the said advertisement service is received for and on behalf of the Gujarat factory? The draft circular referred to earlier suggests that through the HR Team, the head office internally generates a support service for the Gujarat factory, albeit through another circular, a relaxation in valuation has been provided to the extent of salary costs of the HR Team. If the Head Office is providing a support service to the Gujarat factory, is the advertisement service not received and consumed by the Head Office on its’ own account for further rendition of the ‘cross-charged support service’?

Based on the above examples, one may conclude that the provisions of input service distributors will get triggered only when the tax invoices for the services are received for or on behalf of distinct persons. Receipt would mean actual receipt of service and not an imaginary receipt in the form of perceived benefit. In cases where a service is received and consumed by the HO, the provisions of the input service distributor will not get triggered. It may also be possible that the service is received for self-consumption by the head office and the consumption of the said service may result in the generation of another supply of goods or service for the branch. The two examples mentioned above drive home this interpretation.

There may also be situations where the service may be self-consumed by the head office with no further supply of goods or services to the branch. For example, a research service procured by the head office may not immediately result in a further supply of support services to the branches. At the same time, in many cases, it cannot be said that the research is undertaken for or on behalf of the branches. At some future point in time, an indirect benefit of the service may be derived by the branch, but merely a derivation of some indirect benefit cannot result in the presumption that the head office procured the service on behalf of the branch.

NEXT STEPS TOWARDS IMPLEMENTATION

– Registration

With ISD becoming mandatory w.e.f. 01.04.2025, the first step towards preparing for ISD would be identifying the number of such offices that qualify as ISD. All offices that undertake centralized procurement of services / procurement of services consumed by more than one registration will have to apply for registration. Wherever possible, organizations will have to move towards decentralized procurement of services, if current procurement is centralized. Similarly, if more than one offices are engaged in centralized procurement, wherever possible, organizations should move towards a single procurement office. Once such offices are identified, the next step would be to apply for registration as an ISD.

– Vendor Communication

Though ISD is mandatory from 01.04.2025, taxpayers will have to apply beforehand for registration and communicate the ISD GSTIN to all the vendors/suppliers for existing as well as new contracts.

In case the vendor communication is not done, the vendors may continue to raise invoices under the regular GSTIN which may delay the taxpayer’s ITC claim. This is because the ITC may not be available for claim in regular GSTIN and the taxpayer will not be able to distribute the ITC under ISD in view of section 16 (2) (aa) of the CGST Act, 2017. It is therefore imperative that all the suppliers for services procured centrally are intimated to the ISD GSTIN in advance.

Vendor communication needs to be done, irrespective of whether the taxpayer is entitled to claim ITC or not. This is because the ultimate objective of making ISD mandatory is to ensure that the taxes flow to the states where the consumption takes place. Therefore, the taxpayer cannot exclude considering supplies not eligible for ITC from the purview of the ISD mechanism.

– Invoicing and Accounting

Taxpayers will also have to adapt their systems to separate accounts & identify the invoices received under ISD registration. More importantly, while accounting for such supplier invoices, care should be taken to ensure that the invoices are accounted / plotted against the ISD GSTIN and not the regular GSTIN to avoid any mismatches. If any invoice pertains to specific GSTINs, a mechanism to identify such transactions should be introduced to ensure that the ITC is distributed only to such GSTINs and not all GSTINs, as it would otherwise amount to erroneous distribution of ITC and may result in recovery proceedings at the recipient GSTIN end.

Similarly, systems will also have to be geared up to account for the ISD invoices issued to the regular GSTIN. This would be crucial in case ISD and regular GSTIN are of the same state. In such cases, the systems may not be geared up for accepting all three taxes, i.e., IGST, CGST & SGST against the same invoice/ document.

– Filing of GSTR6 based on GSTR6A

The ISD compliances lay between the accounting of the vendor invoices and the distribution of the ITC to the regular GSTIN. On the 12th of every month, based on the disclosure by the supplier, invoices will be communicated to the ISD in Form GSTR-6A.

A matching of transactions reflected in GSTR-6A (irrespective of whether ITC is eligible or not) with the corresponding invoices received by the ISD shall be undertaken and after adding, correcting, or deleting the auto-populated details, the ITC available for distribution shall be determined. The ITC so available for distribution shall then be distributed in the following manner:

a) If any ITC pertains only to a particular GSTIN, such ITC shall be distributed only to that GSTIN.

b) Similarly, any ITC that pertains to more than one GSTINs shall be distributed to such GSTINs in the ratio of turnover during the relevant period.

Separate ISD invoices are to be prepared for distribution of eligible & ineligible ITC.

– Compliances & recovery at the recipient’s end

The various compliances that apply to a claim of ITC, such as receipt of goods / services, payment of tax by the supplier, payment of consideration to the supplier, etc., in case of ISD shall apply to the receiving GSTIN. Therefore, the taxpayers will have to specifically keep track of payment to suppliers to ensure compliance u/r 37 & classification of the invoice for Rule 42 purposes and the said compliance will have to be done by the GSTIN receiving the ITC.

If the ISD receives any credit note for an invoice that has already been considered in the earlier period distribution, the ISD will have to ensure that the reduction in the distribution of the ITC on account of the credit note follows the same ratio applied for distribution of the ITC on the invoice.

Lastly, if any excess distribution by ISD is determined, the recovery shall be done at the recipient end and not at the ISD end. Therefore, an officer of the recipient GSTIN can very well demand to verify the compliances of ISD and may result in potentially multiple and in some cases, conflicting proceedings.

Disputes surrounding the applicability of ISD vs. cross-charge

The examples explained above suggest that the line of divide between ISD and cross charge is very thin. In the absence of authoritative objective guidelines in this regard, it is likely that there can be disputes on the applicability of the said provisions.

In case the taxpayer considers a particular transaction as a subject matter of ISD and the same is ultimately held to be not a subject matter of distribution but that of cross charge, there could be a risk of denial of input tax credit at the recipient’s end on account of excess distribution of credit by the input service distributor. Independently, there could be an action against the head office for undervaluation of cross charge (the action could survive only if the recipient is not eligible for full input tax credit)

In a reverse scenario where the taxpayer has considered a particular transaction as a subject matter of the cross charge, but the same is ultimately held to be a subject matter of input service distribution, the credit claimed by the head office can be denied on the grounds of non-receipt of input service (since the allegation would be that the service is received on behalf of the branches). Further, at the branch level, there could be a risk of denial of credit embedded in the cross-charge invoice by the head office to the branch again on the ground of the non-existence of a ‘cross-chargeable service’

Conclusion:

While both the concepts of ‘cross charge’ and ‘input service distributor’ attempt to address the same problem of non-alignment of input tax credits and output taxes, in terms of implementation, both of them differ significantly. With the concept of ‘input service distributor’ becoming mandatory, it will be important for taxpayers to implement the said concept with full precaution. It may also be appropriate for the Government to provide a detailed guideline on the extent of coverage of the provisions of input service distributors.

BCAJ Admin